Stimulus Bill Follies
Posted by Eddy Elfenbein on January 28th, 2009 at 11:53 am

I find it remarkable that Obama has something like a 70% approval rating and large majorities in both house, yet the terms of the debate seem to be shifting against him. The bill should still pass, but I’m struck by hard it’s been for the Obama team.
The Wall Street Journal editorial board, if you can imagine this, doesn’t like it:

We’ve looked it over, and even we can’t quite believe it. There’s $1 billion for Amtrak, the federal railroad that hasn’t turned a profit in 40 years; $2 billion for child-care subsidies; $50 million for that great engine of job creation, the National Endowment for the Arts; $400 million for global-warming research and another $2.4 billion for carbon-capture demonstration projects. There’s even $650 million on top of the billions already doled out to pay for digital TV conversion coupons.
In selling the plan, President Obama has said this bill will make “dramatic investments to revive our flagging economy.” Well, you be the judge. Some $30 billion, or less than 5% of the spending in the bill, is for fixing bridges or other highway projects. There’s another $40 billion for broadband and electric grid development, airports and clean water projects that are arguably worthwhile priorities.
Add the roughly $20 billion for business tax cuts, and by our estimate only $90 billion out of $825 billion, or about 12 cents of every $1, is for something that can plausibly be considered a growth stimulus. And even many of these projects aren’t likely to help the economy immediately. As Peter Orszag, the President’s new budget director, told Congress a year ago, “even those [public works] that are ‘on the shelf’ generally cannot be undertaken quickly enough to provide timely stimulus to the economy.”
Most of the rest of this project spending will go to such things as renewable energy funding ($8 billion) or mass transit ($6 billion) that have a low or negative return on investment. Most urban transit systems are so badly managed that their fares cover less than half of their costs. However, the people who operate these systems belong to public-employee unions that are campaign contributors to . . . guess which party?

Stryker’s Earnings
Posted by Eddy Elfenbein on January 28th, 2009 at 12:38 am

After the bell, Stryker (SYK) reported Q4 EPS of 74 cents which is in line with estimates. Sales rose 3.6% to $1.72 billion. The company said that EPS for 2009 will range between $3.12 and $3.22. The company earned $2.83 for 2008 so that’s growth of 10% to 13%…not bad for a depression. Last month, the company increased its dividend by 21%.
Here’s the earnings call transcript from Seeking Alpha. Also, here’s the recent EPS trend:
2002: $0.88
2003: $1.12
2004: $1.43
2005: $1.75
2006: $2.02
2007: $2.40
2008: $2.83
2009: $3.12 to $3.22 (est)
Six months ago, I wrote: “I like Stryker a lot but I wouldn’t mind seeing it cheaper.” Well, the stock is 38% cheaper.
Since Stryker’s IPO, the stock is up 49,160%. Berkshire Hathaway (BRKA) is up “only” 45,222%.

Pfizer & Wyeth
Posted by Eddy Elfenbein on January 27th, 2009 at 9:26 pm

Now that Pfizer (PFE) and Wyeth (WYE) are getting together, I wanted to take a quick look at the long-term performance of both stocks. They’re done pretty well. Since the beginning of 1982, Pfizer’s stock is up 1,346.4% while Wyeth is up 875.4% (neither figure includes dividends). For comparison, the S&P 500 is up 589.1%.

Interestingly, both stocks peaked nearly ten years ago on the same day, April 12, 1999.

The Most Predictive Factor: Momentum
Posted by Eddy Elfenbein on January 27th, 2009 at 12:37 pm

Mebane Faber posts about Richard Tortoriello’s book, Quantitative Strategies for Achieving Alpha.

In the more than 40 single factors he tested from 1987-2006, guess which factor was most predictive?
Momentum.

This isn’t a surprise to me. I think the power of momentum is one of the great mysteries of finance. Why has it been so successful and can it make me money?
Mebane also notes the limitations of quant analysis. Right now, everyone is working from the same data so how can anyone gain an advantage?

Credit Default Swaps
Posted by Eddy Elfenbein on January 27th, 2009 at 10:44 am

Peter J. Wallison writes “Everything You Wanted to Know about Credit Default Swaps–but Were Never Told.” This comes on the heels of Gretchen Morgenson’s recent column, “Time to Unravel the Knot of Credit-Default Swaps.”

Thain Doing His Part
Posted by Eddy Elfenbein on January 27th, 2009 at 10:13 am

According to the New York Post, while dining recently, John Thain, “loudly told the waiter, for all to hear, ‘under the circumstances with this tough economy, I think I’ll have tap water.'”
Going by his recent track record, I’m guessing he offered to pay $3.7 billion for the tap water.

Dividends Being Cut at Fastest Pace in 50 Years
Posted by Eddy Elfenbein on January 27th, 2009 at 9:54 am

Bank of America (BAC) recently cut its annual dividend from $1.28 a share to four cents. (Why even keep it?) Of course, now that you’re on Uncle Sam’s bailout list, it’s hard to justify send profit checks to your owners. Dividends had made a big comeback in recent years, now it looks like the trend is in the other direction:

Already this year, seven companies in the Standard & Poor’s 500 index have decreased their dividends, removing some $12 billion from shareholders’ pockets in the coming months. On Monday, Pfizer became the latest blue-chip company to do so.
These cuts serve up another hit to shareholders who have already been battered by the steep declines in the stock market. That is especially true of retirees, who tend to be attracted to so-called “widows and orphans” stocks that provide them with a steady cash flow.
If the trend continues, this will be the worst year for dividend cuts since 1958, when annual payments fell by 8.4 percent, according to new research from S&P.
“It is easy to say this is going to be the worst in 50 years, but the bigger question is whether it is going to be much worse than that,” said Howard Silverblatt, senior index analyst at S&P.

Geithner Is Confirmed
Posted by Eddy Elfenbein on January 26th, 2009 at 6:24 pm

The Senate votes to confirm Geithner 60-34.

Cyclical Stocks Still Have a Long Way to Fall
Posted by Eddy Elfenbein on January 26th, 2009 at 3:59 pm

Here’s a look at the Morgan Stanley Cyclical Index (^CYC) divided by the S&P 500 (^SPX). For such a simple metric, I think is an often-revealing look at the market’s mentality. What it tells us is how well economically sensitive stocks are performing compared with the overall market.
About two years ago, I started warnings investors that cyclical stocks were heading towards a top. On July 19, 2007, the CYC reached its peak ratio against the S&P 500 at 0.7273. Since then, all most all kinds of stocks have down poorly but cyclical stocks have down much worse. Through Friday, the S&P 500 is down 46.4% from July 19, 2007, but the CYC is down 62.3%.
The other reason why I like to follow this ratio is that it tends to move in multi-year waves, as one would expect from looking at economic cycles. Until the ratio starts to show some improvement, I’m not going to be terribly optimistic for the broader economy. The ratio is currently around 0.51 which is still well above typical cycle lows.

Blame China
Posted by Eddy Elfenbein on January 26th, 2009 at 12:56 pm

Sebastian Mallaby claims China’s currency policy was a major cause of the housing bubble:

Geithner is correct that China manipulates its currency. What’s more, this manipulation is arguably the most important cause of the financial crisis. Starting around the middle of this decade, China’s cheap currency led it to run a massive trade surplus. The earnings from that surplus poured into the United States. The result was the mortgage bubble.
China’s leaders protest that they are being unfairly scapegoated. Yet while there are rival accounts of the origins of the crisis, neither has the explanatory force of the blame-China narrative.